Detailed analysis of the major alternative bond market indexes indicates that the correlations between all the series are high, while the correlations between corresponding sector indexes are extremely high. Furthermore, indexes purporting to measure the same market sector resemble each other with respect to standard deviation and average annual return.
Although their long-term movements are similar, however, bond indexes may differ markedly over shorter periods. Mean absolute tracking deviations are greater than 10 basis points, and short-run discrepancies are particularly large for corporate and mortgage indexes. The oscillation in monthly tracking deviations indicates that behavior converges over the long run, so mean absolute tracking deviation declines as holding period increases.
Monthly bond index returns display significant autocorrelation over time, unlike equity index returns. An analysis of the time series properties of 10 constant-maturity indexes reveals that term to maturity explains this autocorrelation. The accrued interest component of bond returns, which is larger the shorter the maturity of the bond, leads to high levels of autocorrelation in short term rates and relatively lower levels at longer rates.
The bond market has experienced significant compositional changes over the past 15 years. The surging growth of the mortgage sector and the continuing growth of the government sector have led to a significant decline in the relative weight of the corporate sector. An examination of the average maturities and durations of the various sectors indicates a declining trend for the corporate sector and a partially offsetting increase in the government sector; the mortgage sector continues to display very volatile maturity/duration levels. Changes in sector weights have led to a considerable decline in the maturity/duration of the aggregate bond market.